Notes from the Road

Tyler Glauser in South Africa


Tyler Glauser Hout BayThis quarter the team was in France, the UK, Turkey, Taiwan, India, South Korea, the Philippines, Japan, South Africa, Texas and Virginia. The following are Tyler Glauser’s notes from South Africa. Tyler is a research analyst on the Consumer team who has been working with us for the past three and half years while studying Accounting at the University of Utah. He will graduate next month and join our team full time:

South Africa, especially Cape Town, is a beautiful place. The Dutch arrived in 1622 and began to develop Cape Town. It was all a part of developing a faster shipping route to get goods (especially silk and spices) to Western Europe from Asia and the Middle East. They tried to get local villagers to cooperate with them in building up port cities, but as can be easily imagined, the locals weren’t too happy about them being there in the first place so they would not help. Upon seeing this, the Dutch began to bring in slave laborers from other places. Soon, South Africa was full of Dutch speakers, native language speakers, as well as slaves speaking languages from 5 other places, including India. Afrikaans emerged as a Dutch-based language that was a mixture of all of the above. It is a uniquely expressive language as it came out of the best ways to phrase things in each of the different languages around at the time. In 1802, the British arrived and basically beat up the Dutch and took Cape Town and South Africa from them. Today, there are 11 official state languages in South Africa, as well as another seven that are commonly spoken. The most prominent of these are English and Afrikaans. Cape Town has a heritage in wine and fruit production and today is largely driven by tourism from various parts of Europe and Asia. The city is set on all sides of the enormous Table Mountain. Durban, in contrast, is home to beautiful rolling hills, full of green sugar cane, giving it the appearance of something you might see in southern Italy. The city is spread out quite a bit as the old city center was on the opposite side of the city from where the new airport was built for the World Cup a few years ago. Development has focused near the airport since then, creating decentralized urban sprawl. Johannesburg has more of a history in gold and mining that prevails in today’s economy. It certainly has a different feel than the other two major South African cities, with worse traffic and more intense population centers, where litter, abandoned buildings, pollution and, automatic weapons are typical elements of the scenery.

Tyler Glauser Hout Bay

The unfortunate reality for the whole country is that political uncertainty and structural unemployment have given rise to a wide array of crime. Overall, Cape Town is probably a safer place than Johannesburg, but has gang issues. Certain communities experience an average of 250 murders annually per 100k people. Think about it! It’s like two of your Facebook friends being murdered every year. What a sobering, scary reality. It’s truly a peculiar thing to juxtapose this reality against some of the nicer communities. We went running one morning in Cape Town with Gary Davidson, the CEO of KayDav Group. He took us to his neighborhood and we ran on a beautiful boardwalk with Lion’s Head Mountain to the East and the Atlantic Ocean to the West. It was beautiful. The sun just started coming up over the city as we were finishing the run and it was stunning. As we ran I was baffled by the number of fit-looking people we encountered who politely greeted us and Gary in a friendly way. He knew all of them, neighbors in the Jewish community in their own little pocket of Cape Town. Gary referenced a sort of exodus of his community as many people have been leaving Cape Town and moving to Australia and other places where it is safer—a sad strain to see on what is a really incredible place.

Durban is relatively safe compared to the other cities, but Johannesburg is the worst by far. The bulk of the violent crimes (muggings, home invasions, etc.) take place in Johannesburg. In all three cities, the remnants of apartheid are apparent as all the executives we met with were white, and all the drivers, assistants, janitors, etc. were black. Although the inequality is apparent and there is still a lot of public discontent, the black middle class has experienced real progress in the last few years. Locals talk about LSM, Life Style Measure, on a scale of 1-10, with 10 being the uber-wealthy and 1 the impoverished. Five years ago, the bulk of the black population was in LSMs 1 - 4, but today that has shifted upwards, with the majority today living closer to LSM levels 3 - 5. Hopefully this trend will continue. The point is that as the middle class continues to rise, there will be more social equality, more consumers spending more money, and unemployment will decrease as the 26% of people without jobs become more educated and develop more employable skills. In a stable political environment, this will provide a big tailwind to the economy.

The consumer credit outlook in South Africa is grim. There are 35 million adults in South Africa, and 24 million of them are credit active. There are 10.7 million consumers with at least one retail apparel credit account, 8.3 million with unsecured loan accounts, and 5.2 million people with at least one credit card. Of these, 10 million consumers are more than 3 months late on payments in at least one account. The percentage of non-compliant loans for houses and cars in South Africa is around 5%, but goes up to over 40% for apparel retailers, and is something like 30% for furniture. The regulatory limit for short term interest rates is 35%. Truworths, for example (apparel retailer who makes 70% of sales on credit) said its average interest rate is 25%. In reviewing the apparel retailers, it becomes clear that retailers are likely the last place a customer will pay when under financial stress. I really liked the Transaction Capital meeting we had, largely because of this reason. They provide services and support to the taxi drivers in order to ensure they are utilizing the purchased asset well and making money in order to pay it off. The apparel guys basically just don’t let consumers shop anymore until they pay their current debts. So, the country is in a highly levered scenario causing regulators to step in. Last September, regulators issued new requirements for offering credit which have hurt a lot of the credit-dependent businesses. I do expect that these changes will be good in the long run.

Nearly every company we spoke with during our trip referenced some sort of pan-African growth story. There are massive underdeveloped markets with high population growths waiting to be tapped for their potential. The middle class is just starting to emerge in many of these places and in the next ten years, we will likely see massive growth pick up. The problem has been and will likely continue to be issues with monetary and fiscal policy and commodity-dependent economies that experience massive cyclicality. Recent years with low oil prices have been bad for many of the countries, especially in Eastern Africa. Western and Central Africa have had more issues with war and conflict that have created uncertain business conditions as well. Yet many companies we met with have been able to establish some growth. Shoprite, for example, has a small base of stores in several other African countries. The brand has gained some great traction and in Nigeria, the word “Shoprite” is used to describe an entire shopping center, that may include a Shoprite and a bunch of other stores. South Africa feels to me like things are very difficult still, but there is a lot of low hanging fruit starting to show itself, which could make things take off in a big way once a turn comes. The companies here are positioned ideally to take advantage of development across the entire African continent. President Zuma has had a presidency marked by corruption scandals and lack of effective economic stimulation. The next African National Congress(ANC) elections are this year, and the national elections are in 2019, and many of the managers mentioned that they thought if a new, competent president were elected and things go smoothly in the transition, the economy would really take off. From a 15-20 year perspective, I expect the South African economy to emerge with massive growth and the businesses there to flood the rest of the African Continent.